Tenneco Strategy Paying Off

Ji Case Purchase Added Diversity

When Tenneco Inc. bought Newport News Shipbuilding in 1968, the parent corporation was primarily an oil company that was trying to diversify into other areas.

Tenneco has changed.

Today, in terms of net sales, the largest segment of the Houston-based conglomerate is the JI Case farm and construction equipment division. Tenneco jettisoned its oil and gas businesses for $7.6 billion in 1988.

FOR THE RECORD - Published correction ran Tuesday, May 8, 1990. A chart showing Tenneco Inc.'s shifting emphasis incorrectly listed revenue figures as millions. All the revenue figures listed were in billions of dollars. A corrected version of the chart appears on Page B6 on May 8, 1990.

"Without the dominance of our former oil and gas businesses, we've emerged as a highly profitable diversified industrial company," chairman J.L. Ketelsen said in the company's 1989 annual report.

Ketelsen's diversification strategy ran against the grain of popular American corporate philosophy in the 1980s. As a result, the company was a subject of strong takeover rumors at least three times in the past decade.

Stockholders were most skeptical of his decision to pour money into JI Case, including buying International Harvester, a nearly-bankrupt competitor, for $475 million in 1985, and spending $927 million in capital expenditures on Case during the past five years.

But the philosophy now seems to be paying off, say Tenneco officials and some analysts who follow the company.

"Some would say the strategy was crazy," said Julie Niemann, an analyst for Stifel Nicolaus in St. Louis. But she said the company's moves in the 1980s, and particularly those involving Case, are "going to work out."

"We're in the second year of the re covery of the farm cycle, and we have information that the upswings tend to be very long - 10 to 16 years," said David Braunstein, an analyst with Lovett, Underwood, Neuhaus & Webb in Dallas.

Although Tenneco is still based in Houston, its corporate flavor today is decidedly Midwestern.

In addition to Racine, Wis.-based JI Case, the second largest maker of American farm equipment, and Newport News Shipbuilding, the largest shipyard in the United States, Tenneco owns a variety of non-manufacturing businesses, including:

* Tenneco Gas, which operates four pipelines that supply South Texas natural gas to New England and the Midwest; and

* Two minerals companies, Albright & Wilson Ltd., a producer of phosphorus and detergent chemicals, and Tenneco Minerals, a maker of soda ash, used in glass detergents and chemicals, and owner of gold mines in Utah and Nevada.

Tenneco got its start in 1944 as the Tennessee Gas Pipeline Co., a natural gas supplier that built a 1,265-mile pipeline from Texas to West Virginia.

The company first diversified into petrochemicals, oil and gas production, oil refining and marketing, and life insurance, which it abandoned in 1986.

Like other companies, Tenneco caught the diversification craze in the 1960s, when it bought unrelated subsidiaries including Newport News and Case.

But the company remained dominated by its oil business: Prior to its sale of oil and gas assets in 1988, Tenneco was the nation's 10th largest oil company.

While other companies sold off unrelated subsidiaries in the 1980s to focus on their area of expertise, Ketelsen said diversity offered benefits to Tenneco.

"Overall, our diversification strategy has paid off during the last 20 years: We've been able to ride temporary downturns in one industry because of the stength of our other businesses and, over the long haul, all of our businesses have profited from the interrelationship," Ketelsen said in the annual report.

Braunstein said Tenneco still has a "strange mixture" of companies, which Wall Street traditionally does not favor.

"I personally don't see a whole lot of synergies in their businesses. They would probably fetch a higher cost separately than they do as a group," he said.

But he added that being a conglomerate offers some advantages: The corporate headquarters can arrange for better financing than the divisions could on their own, and, because conglomerates can suffer from depressed stock trading values, the company can buy back shares at a discount. Tenneco is currently buying back 300 million shares.

Niemann said the company's diverse product mix still "needs to be rationalized at every step," particularly because cuts in the Navy shipbuilding budget may hurt Newport News.

Niemann said she was concerned about the impact of Pentagon decisions to review the effectiveness of the Seawolf submarine and to consider trimming the nation's fleet of aircraft carriers.

"These days you never know. It's like reading tea leaves in the defense budget, and it doesn't look good," she said.